Shriram Transport gains on TPG’s stake sale talks; UBS downgrades

NEW DELHI: Shriram Transport Finance Ltd (STFL) surged over 2 per cent on Monday following reports that the Piramal Group is in advanced talks to buy US private equity firm TPG Capital's 20.27 per cent stake in STFL, for around Rs3,500 crore.

UBS in its morning note has downgraded Shriram Transport from 'buy' to 'neutral' rating as it expects only limited upside in near term after recent rally.

At 12:30 pm, Shriram Transport Finance was trading 1.9 per cent higher at Rs 764.90. It has hit a low of Rs 756 and a high of Rs 771.30 in trade today. Piramal Enterprises was trading 0.8 per cent higher at Rs 540.

"TPG Capital has already sounded out its partner (Shriram) about Piramal Group being a potential buyer, and it has given its consent," one of the persons told ET, adding that contours of the proposed deal involve TPG selling its entire holding in a block sale to Piramal Healthcare at current market price. "The sale will fetch around Rs3,500 crore and the block sale will help TPG save on capital gains tax."

Puneet Bhatia, head of TPG Capital in India, declined comment while the Piramal Group, whose businesses span healthcare to real estate, said in an emailed response.

"Piramal, is sitting on a moun-tain of cash since selling his formulations business to America's Abbott Laboratories in 2010 for $3.72 billion," ET reported.

Private Equity firm TPG bought into Shriram in 2006 through affiliate Newbridge Capital, which acquired a 49 per cent stake in unlisted group holding company Shriram Holding Madras Pvt Ltd.

According to analysts the deal should get completed in the month of February and is good for Piramal Enterprises.

"The deal is at an advanced stage and will conclude in late Jan or early Feb and will have consent of the SHTF promoters," Kim Eng said in a morning note.

"This is good for Piramal Enterprises as it is looking to scale up and also positive for SHTF as uncertainty on the stake sale by TPG will end," said the report.

The research firm maintains 'buy' on Shriram Transport Finance with a target price of Rs 800 per share.

UBS downgrade Shriram Transport to 'neutral' from 'buy'

The stock has rallied 15 per cent in the month of December, while for the year 2012 the stock has bounced over 80 per cent. Shriram Transport has outperformed both the Sensex and Nifty Bankex by huge margin.

UBS is of the view that the stock is already pricing in an improving growth outlook and declining asset quality risks. The stock offers limited upside in the near term due to the recent strong rally.

The brokerage says the new regulations proposed by the Reserve Bank of India (RBI) for NBFC's is likely to cap return profile.

UBS has marginally raised earnings by 2 per cent for FY13 & 14. The brokerage has raised the price target from Rs 750 earlier to Rs 800.

We expect the recent NBFC draft guidelines issued by the RBI regarding Tier I capital, NPL recognition, and provisioning to impact the profitability of NBFCs including Shriram Transport.

While new securitisation rules are expected to lower incremental spreads, it could be partly offset by a decline in the cost of wholesale funds, in our view. UBS expects Shriram Transport to benefit from the improvement in the capex cycle and the improved economic outlook.

UBS expects the earnings growth of a 17 per cent CAGR over FY12-14E, while AUM growth is likely to increase at a CAGR of 17 per cent over FY12-14E.

The brokerage firm also expects the NIMs for FY14E to stay flat at 7.7 per cent with the change in loan mix and expects credit costs at 2%/1.8% for FY13/14E.